After a year in which the world economy experienced heightened volatility and global growth slowed, there has been a positive shift in opportunities ahead for SME exporters.
Trade is still growing, albeit at a slower pace than before the global financial crisis (GFC).
After relatively modest growth of 2.6 per cent last year, Efic expects global trade will accelerate to 3.4 per cent in 2016.
Softer global demand has been the main driver of this modest growth, as the global economy continues to recover from the GFC, the domestic integration of the Chinese market and growing protectionism in economic policy.
For the foreseeable future we expect annual global trade flows to remain below the 7 per cent growth experienced in the decades before the GFC.
As China has focused on rebalancing its economy away from investment-led growth and over-supplied commodity markets, global commodity prices have fallen, which has impacted on many SME exporters and supply chain contractors involved in the mining services industry.
These falls in commodity prices are weighing heavily on mining export receipts, which has impacted both Australia’s terms of trade and the AUD.
CHART 1: Terms of trade now in line with GDP, with a lower AUD positive
A shift in sectors
The good news for SME exporters is there are still many new export opportunities for those seeking to expand in international markets.
The weaker AUD has boosted Australia’s international competitiveness in many sectors outside mining services, including agriculture, services and manufacturing.
Service exports, such as tourism and education, have been particularly responsive to the lower AUD, recording 8.5 per cent average annual growth over the last three years.
This has been driven by increasing numbers of both international tourists and students coming to a more affordable Australia, which has driven up the country’s export earnings in these sectors.
Export earnings from tourism and related services were over A$42 billion in 2015, up 11 per cent from 2014.
CHART 2: Agriculture and services are accelerating, manufacturing set to follow
What does 2016 hold?
We expect global growth overall will remain soft through 2016, with improvements in the US economy being impacted by a slowing China and sluggish emerging market demand.
The trifecta of free trade agreements (FTAs) with China, Japan and South Korea, and the new Trans-Pacific Partnership (TPP) trade agreement, should all add to opportunities for Australia’s SME exporters.
Signed in October 2015, the TPP is the largest trade agreement in over two decades and has been linked by ten Pacific Rim countries including the United States, Canada, Mexico, Japan, Malaysia and Singapore.
These agreements will open up these markets to SME exporters by improving access and reducing costs like tariffs and import fees. This will pave the way for greater diversification, and improved competitiveness and productivity.
Among the biggest winners will be agricultural exporters, especially those in processed food and beverages, as Australia gains greater access to Asia’s expanding middle class.
This is a huge opportunity given the scale of Asia’s growth, especially when you consider China’s middle class is expected to grow by 400 million people over the decade to 2022.
The recent removal of agriculture export subsidies by the World Trade Organization across its members will also put Australian SME exporters on a more level playing field globally, with dairy, meat and wheat exporters likely to benefit from this decision.
Finally, Australia’s advanced manufacturers are expected to export more in 2016.
Manufacturing is typically the last sector to respond to a depreciation of the AUD reflecting lead times in ordering capital equipment required to manufacture.
The latest Purchasing Managers’ Index (PMI) data suggest Australian manufacturers are optimistic, with exporters particularly sanguine.
About the author:
Andrew Watson is the Managing Director of Efic, a specialist in export finance. With a career spanning over 20 years, Andrew Hunter held a series of senior positions in financial services before joining Efic. After spending 10 years at Banker’s Trust working in Australia and Hong Kong in credit and risk management, structured finance and debt origination, Andrew joined Macquarie in 1999 when the Group acquired BT.